Economic roots

AT AN AUTOMATED teller machine in Cairo on February 2. More than half the banking system in Egypt is now in private hands. - VICTORIA HAZOU/AP

The upsurge in Egypt is not simply about democracy versus dictatorship. It is also a revolt against a manifestly unjust economic order.

THE ongoing turmoil in Egypt a popular upsurge that could yet turn into a revolution has widely been seen as a result of the anger and frustration among the people because of three decades of the most extreme political repression. But it is also clear that material conditions have played a significant part in generating the widespread rage and resentment that finally created a political tipping point on the streets of Egypt's cities in the last week of January.

Indeed, this particular aspect of the authoritarian regimes of the Arab world has been largely missed in much of the recent commentary: not only are these regimes undemocratic and politically repressive but they have also been increasingly and aggressively neoliberal in their economic orientation. Whether in Tunisia or in Egypt, they were willing to allow their citizens to be buffeted and trampled upon by global and local vicissitudes while protecting and even systematically furthering the economic interests of a very small elite. And this is indeed a major, if not the dominant, reason for their unpopularity.

The government of President Hosni Mubarak inherited an economy that was still largely state-led because of the legacy of Gamal Abdel Nasser. But the period since the early 1990s was marked by the growing political influence of the former heir apparent, Gamal Mubarak, and the ascendancy of the International Monetary Fund (IMF) in economic policymaking. The agreements signed with the IMF and the predilections of Mubarak's son led to a major shift towards privatising state assets, deregulating markets and generally going in for market-oriented reforms that reduced explicit government control.

External trade was liberalised and import tariffs were cut to very low average rates of less than 7 per cent by 2007. Exchange controls were mostly lifted. Personal and corporate income tax rates were slashed. The modernisation of tax administration also involved a move to self-assessment of personal income taxes. A wide range of productive assets that were in public ownership were privatised. Significantly, a large part of finance was also privatised, such that more than half the banking system is now in private hands. Private and foreign players were allowed into insurance markets, and other financial markets were deregulated.

These changes were accompanied by the usual panoply of measures associated with macroeconomic stability. Monetary policy was concerned only with targeting a core rate of inflation and did not bother to consider its effects on economic activity and employment or to deal with price inflation in specific necessities. Attempts at reducing the fiscal deficit were typically based on increasing indirect taxes which affected the common people, wage restraint for public sector employees, and increases in fuel prices and in other user charges for public utilities and services.

All these moves gained the usual international recognition among the arbiters of the world economy. Thus, Egypt earned the (surely always dubious) honour of being named the top reformer of all developing and transition countries in the World Bank's 2007 Doing Business Report. Meanwhile, unemployment raged on it is currently estimated to be around 20 per cent of the labour force, and as high as 50 per cent among the youth. Absolute poverty actually increased to around one-fifth of the population, even before the sharp increase in food prices since 2007.

The rising economic inequality was associated with falling material standards of a significant part of the population as the price of basic necessities continued to increase, wages stagnated, and gainful employment became even harder to find. Says Nader Fergany, author of the Arab Human Development Reports from 2002 to 2005: There's a vicious circle of the small clique getting filthy rich and the rest getting impoverished. We have returned this country to what it used to be called before the 1952 revolution: the 1 per cent society. One per cent controls almost all the wealth of the country. (Tipping point for Egypt's downtrodden masses, Financial Times January 30.)

All this has suddenly become apparent to international investors and their advisers, who were earlier united in their enthusiasm for the Egyptian government's zeal for neoliberal reforms. A few days after the large demonstrations started in the streets of Cairo, the credit rating agency Moody's, which had kept its rating of Egypt unchanged at investment grade for the past seven years, quickly downgraded the country. It noted that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. It is interesting that these features became apparent to them only after large-scale political unrest, which seemed likely to overthrow the regime, surfaced. In fact, these were also noticed by the other credit rating agency Standard and Poor's, which followed suit a day later, reducing Egyptian bonds to junk status.

For its part, the IMF has been predictably tardy and typically blinkered in its assessment of the Egyptian reality. In 2008, it lauded Mubarak's government for creating an economy on the move, arguing that Egypt's implementation of the economic reforms that the IMF had recommended had enhanced growth performance while strengthening macroeconomic stability. This, in turn, was seen to have made Egypt an attractive destination for investors, expressed in large capital inflows, which the IMF saw as strengthening the growth impact of the reforms (even though it mostly added to foreign exchange reserves). Apparently, the increasing incidence of absolute poverty, high unemployment and growing inequalities were not seen as causes for concern at that point.

Subsequently, even after the Egyptian economy was buffeted first by the sharp increase in global food and fuel prices and then by the adverse impact of the global recession, the IMF continued to argue for further structural reform which would inevitably reduce real incomes of the working class and the peasantry. Its insistence on reducing subsidies on essential items was accepted by the Mubarak regime, which moved to eliminate almost all subsidies on energy and significantly reduce those on food and that too, in a context of global price volatility.

Not surprisingly, this added to the pain of ordinary people, another fact noted rather baldly (but still approvingly) by the IMF in its most recent assessment. In Egypt, inflation has in large part been driven by a surge in prices of several food items and the government's streamlining of consumer subsidies a welcome move ( Regional Economic Outlook Middle East and North Africa; IMF, October 2010; page 31).

Now, of course, the IMF claims that it had known the possible consequences all along. Dominique Strauss-Kahn, IMF Managing Director, in a speech in Singapore on February 1, noted that rampant unemployment and a growing income gap was a strong undercurrent of the political turmoil in Tunisia and of rising social strains in other countries. He also pointed to rising food prices as having potentially devastating consequences for developing countries. Most disturbingly of all, he promised that of course, the IMF is ready to help in defining the kind of policy that could be put in place.

That last point is really the biggest danger at present. It is crystal clear that the major powers, the United States in particular, are attempting to create a managed and orderly transition in Egypt, in which the top faces of the regime may change but almost everything else will remain the same. This is a recipe for disaster. The current upsurge in Egypt, as in Tunisia, is not simply about dictatorship versus democracy.

It is also a popular revolt against an economic order that is seen as manifestly unjust. If the struggles and sacrifices made by the people in order to change this are thwarted by a reversion to business as usual even with different leaders, it may well generate public sympathy for a more regressive and much less attractive form of opposition that religious extremists would benefit from.

The basic lesson that is emerging from the current Arab upsurges should not be underestimated elsewhere in the developing world. Neoliberals of all stripes authoritarian, democrat or wavering in between will have to learn that if they do not respect the voices on the streets, they may have to fear them.